Fitch and Bad Loan Problems in India

From Bloomberg this morning:

Indian banks may see bad loans swell as interest-rate increases this year failed to deter consumers from borrowing more, Fitch Ratings said in a report today.

Bad loans from defaults on home mortgages could rise if interest rate increases this year are followed by a decline in property prices, the credit assessor said. About half of loans to individuals are to buy homes, the prices for which have doubled over the past two years in south Mumbai, according to Cushman & Wakefield.

``Consumer loans typically carry higher risk and delinquencies would depend on underwriting standards of individual banks,'' said Vishal Goyal, an analyst with Edelweiss Capital Ltd. ``It is not a concern at this point in time because banks are anyway charging higher risk spreads on such loans.''

India's bank lending rates rose this year after the central bank raised the cost of borrowing to contain inflation fueled by real estate purchases that were funded with loans. ICICI Bank Ltd., the nation's second biggest, and HDFC Bank Ltd. gave 33 percent more loans in the three months to Sept. 30, while loans by State Bank of India, the biggest, grew 26 percent compared with a year earlier.

``The need to access capital may come into sharper focus if the credit cycle deteriorates,'' Fitch said.

Indian banks may find it more expensive to raise capital overseas, with rising rates prompting some to delay borrowings, Fitch said in the report. The need to raise capital ``could well provide an impetus for consolidation'' among banks, it said.

Higher Credit Demand

Still, banks would continue to benefit from rising credit demand as companies invest further to gain from a growing economy, Fitch said. India's $906 billion economy will probably post its third year of at least 9 percent growth in the year to March 31.

Housing Development Finance Corp., which is 12.6 percent owned by Citigroup Inc., posted a decline in bad debt and expects to meet its annual loan target of 25 percent, Chairman Deepak Parekh said yesterday in New Delhi.

The strengthening of the rupee against the dollar could hurt smaller textile exporters, Fitch said. The local currency is headed for the biggest annual gain since 1974, increasing more than 12 percent this year against the dollar, data compiled by Bloomberg showed.